If the European Union has to bail out governments with payments problems in eastern Europe or the euro zone, the conditions would be so draconian as to cast those countries' economies deeper into a vale of tears.

That's why Brussels and Berlin are urging states with wide debt yield spreads over German bonds to take voluntary fiscal consolidation measures now to avert a payments crisis rather than have still harsher austerity forced upon down the road.

The choice is milder pain now or imposed agony later.

The 27 EU leaders agreed at a crisis summit on Sunday there was no need for a mass bail-out of central and east European countries, but individual cases will be considered on merit. A proposal by Hungary, the first EU state to need an IMF-led bail-out last year, for a European financial stability fund of up to 190 billion euros found no support, even from other east European countries.

The drastic spending curbs, tax rises and wage and benefit cuts that Germany and the European Commission would seek as the price for a financial rescue run counter to the economic recovery programme that the EU adopted in December.

Far from giving the hardest hit economies a fiscal stimulus, such deflationary terms would plunge them deeper into recession.

They would also make it harder to carry out structural reforms to raise economic growth potential, such as investment in education, training and infrastructure and payroll tax cuts.

Just look at the impact on Latvia, the second EU state to be granted a rescue package last year. Gross domestic product is now forecast to contract by up to 10 percent this year. The crisis brought down the Baltic state's government after violent protests. Now Riga is required to make further spending cuts under the terms of its International Monetary Fund-led bail-out.

In Hungary, the IMF imposed cuts in social spending and public sector wages.

Ireland, the euro zone state hardest hit by the crisis, has taken voluntary measures in the hope of sparing itself a worse fate, alhough they have not been without a degree of pain.

The government sparked street demonstrations by putting an average seven percent pensions levy on public sector wages. It will have to raise taxes and cut spending further to restore market confidence and bring down a budget deficit forecast to reach close to 10 percent of GDP this year.

But if it had to seek a European rescue, Dublin could also be forced to raise the very low rate of corporate tax that drew massive foreign investment to the Celtic Tiger but infuriated euro zone pillars Germany and France.

German Bundesbank President Axel Weber made clear last week that any EU bail-out of member states in difficulty would come only as a last resort and on strict terms.

"Their concrete form and conditions would then have the character of an IMF loan," Weber told the newspaper Die Welt.

The IMF caused widespread, lasting pain and social unrest in Latin America in the early 1980s by imposing sharp fiscal adjustment in return for restructuring countries' debts.

In the Asian crisis of 1997-98, it pressured countries to hike interest rates, slashing local demand but attracting foreign investors. Recovery was swifter but resentment is deep.

Is there an alternative to the harsh IMF medicine for European states with big balance of payments deficits or debt refinancing problems?

The IMF itself has signalled some change in its philosophy in the current crisis by making available short-term credit to top-tier emerging market countries without the traditional conditionality of its lending programmes.

When Latvia went to the IMF last November, the Fund's experts were initially inclined to encourage Latvia to abandon its currency peg to the euro and let the lat depreciate. The European Commission strongly opposed breaking the euro link and prevailed, arguing that markets would overshoot in such a volatile climate and cause worse instability. A devaluation would have had knock-on effects in the other Baltic states and would have been a disaster for Swedish banks with big investments and credit lines in those countries.

The IMF has countenanced capital controls in Iceland and Ukraine to ensure that its loans do not simply fund capital flight. Some economists are now arguing for interest rate cuts and capital controls in troubled eastern EU states. But a country that took that route would lose any early prospect of joining the euro and forfeit market confidence.

Whether or not such policies make economic sense, they would be politically impossible to sell to the west European countries asked to bail out EU partners in trouble.

If German or French taxpayers are to be asked to foot multi-billion-euro bills to help Romania, Lithuania, Ireland or Greece, the recipients must be seen to be taking the pain.

German Chancellor Angela Merkel underlined this moral dimension to the crisis on Sunday by saying one of the causes was that some countries had been living beyond their means.

REUTERS